Growing Trade War: US vs China

The two largest economies in the world are, technically, at an unprecedented trade war at present and there is no sign of a let-up in sight. The tit-for-tat retaliations have already been in place and it can only get uglier and messier in the coming months, as evolving geopolitical factors start playing their corresponding roles in the conflict.

Judging by President Trump’s recent speech at the UN, there is no sign of backing down on the part of the US. Although, China is not as aggressive as the US, when it comes to find common ground to mitigate the impact, the latter shows no sign of buckling under pressure either.

What is undeniable in the conflict; however, is the fact that the potential impact on those who have been sandwiched between the palms of the two economic giants, especially from the developing world.

For instance, Mike Pompeo, recently said that Pakistan cannot use IMF funds to pay off Chinese debt. Whether has changed the tempo of that message after meeting Imran Khan, the new prime minister, remains to be seen.

During the first round of the tariff war, China swiftly retaliated in equal terms and it was a text-book tit-for-tat response, covering mainly the agricultural products while targeting US farmers – a sizable section of President Trump’s power base.

During the second round, however, China could not deliver a decisive punch: when the US tariffs hit $ 200bn mark, China could only hit $ 60bn in retaliation for obvious reasons: China’s exports to the US are much higher those from the US in the opposite direction.

In short, after the second round, China could not match the US in tariff war. That simply means China is going to suffer when the tariffs imposed by the US are in place. Unofficial economic indicators point to a gloomy picture, but not alarming yet.

Since China has already lost the number game in the tariff battle, it may be forced to resorting to other measures to hurt the US. For instance, China can subject US goods to intense ‘inspections’ citing security risks, which in turn could dramatically stall the smooth flow of good between the two. In addition, it will spell the doom for perishable goods, such as food items.

Moreover, China can wield its power when it comes to restricting the export of rare earth metals, as it currently handles 80% of the global exports. Although, US has deposits of these metals – and of course, technology to extract them – the cost has been too high to turning local; so, the companies turned to China to get them owing to low cost.

If China used rare earth metals as a trading weapon, the US may open the mines that extract these metals once again, perhaps offering encouragement to the industry with Federal help.

In this context, some analysts believe that the 9% drop in Yuan, the Chinese currency, against the US$, as an attempt by China to alleviate the impact of the tariffs by boosting exports. There are, however, analysts who do not agree with this notion: they say the drop of Yuan is an inevitable outcome, not a deliberate attempt to keep the negative impact at bay.

As the trade war gets intensified, analysts could catch glimpses of less-known drama behind the screens: the struggles that certain companies go through in such a way that Chinese equivalents of their products are subjected to increased tariffs, citing unfair competition from China.

The exemption that Apple products enjoy is a case in point; iPhones that come from China are not subjected to recently-increased tariffs. It may be a result of the intense lobbying by Apple – not to change the status quo.

It’s far too early to determine the winner or loser of the looming trade war, when it is in full swing. Judging by historical developments, however, we can safely assume that if the weaker bleeds, the stronger will not escape from being bruised, as plenty of supply chains are not going to survive in the long run.